Will Arm Holdings Be a Trillion-Dollar Stock by 2030?

It's been just over six months since Arm Holdings (ARM 4.11%) went public, and shares of the British chip designer have soared an impressive 111% in this short period. Thanks to this terrific surge, Arm Holdings now boasts a market cap of $138 billion, as compared to $65 billion on the day of its initial public offering (IPO).

The major share of the stock's gains has arrived since the beginning of February 2024, when the company released its fiscal 2024 third-quarter results. Shares of Arm shot up nearly 50% in a single session following its quarterly report last month as it became evident that the company will be a key beneficiary of the artificial intelligence (AI) chip race.

But can AI be a long-term catalyst for Arm and help the company reach $1 trillion in market cap by 2030?

Arm Holdings is built for robust long-term growth

In the third quarter of fiscal 2024, Arm Holdings delivered $824 million in revenue, an increase of 14% over the prior-year period. The company's adjusted earnings increased 32% year over year to $0.29 per share. More importantly, its guidance indicates that its growth is set to accelerate in the current quarter.

The company expects revenue to land at $875 million in fiscal Q4 at the midpoint of its guidance range, along with earnings of $0.30 per share. That would translate into a 38% gain over the year-ago period's number of $633 million. Even better, Arm's remaining performance obligations (RPO) shot up a terrific 38% year over year to $2.43 billion last quarter.

RPO measures the total value of future contracts to be fulfilled by a company. So the faster growth in this metric, as compared to Arm's revenue, is an indication that the company is building a robust future revenue pipeline. One of the key reasons behind this impressive surge in Arm's RPO is the outstanding increase in the number of chipmakers who have opted for the company's Total Access licenses.

The Arm Total Access (ATA) license gives chipmakers access to its complete package of intellectual properties, tools, support, and design expertise. They can use these to accelerate the development time of their chips and bring them quickly to the market. The company ended the previous quarter with 27 such licenses, up from 15 in the year-ago period.

Arm points out that the new ATA agreements are being driven by the growing need for developing high-performance chips to tackle AI workloads. This explains why the demand for its new AI-focused chip architecture has been increasing.

More specifically, the company's Armv9 architecture "garners roughly 2x the royalty rate of the equivalent v8 product." It now accounts for 15% of the company's royalty revenue, as compared to 10% in the second quarter of fiscal 2024.

The demand for this architecture is seeing solid traction in smartphones, cloud infrastructure, and other markets, as well. According to Arm CEO Rene Haas: "From the most complex devices on the planet for training and inference, the Nvidia Grace Hopper 200, to edge devices such as the Gemini Nano Pixel 6 from [Alphabet's] Google or the Samsung Galaxy S24, more and more AI is running on more end devices, and that's all running on Arm."

It's also worth noting that Arm's royalty revenue is set to increase, thanks to the growing demand for AI chips from the smartphone, cloud, and automotive end markets. Apart from the licensing fees that the company receives from its clients when it sells its IP to them, the company's partners also pay it a royalty for each chip containing Arm's IP that they ship.

Given that the demand for AI chips is predicted to increase at an annual rate of nearly 38% through the end of the decade, Arm's future seems bright. This explains why analysts forecast the company's earnings will increase at an annual rate of almost 45% for the next five years. But will this be enough to help it achieve a trillion-dollar valuation?

Where could Arm's market cap be in 2030?

The solid opportunity in AI chips and Arm's ability to capitalize on this market through its licensing and royalty business model indicates that it could indeed live up to Wall Street's earnings growth expectations over the long run. Assuming Arm could clock an annual earnings growth rate of even 40% through 2030, its bottom line could increase to $12.65 per share in fiscal 2031 (which will coincide with the majority of calendar year 2030) using fiscal 2024's projected earnings of $1.20 per share as the base.

Arm currently sports a forward earnings multiple of 83. That's quite expensive when compared to the Nasdaq-100's forward earnings ratio of almost 29. However, it won't be surprising to see Arm commanding a premium earnings multiple in 2030 because of its AI-powered growth. Assuming the stock trades at 40 times earnings at that time, its stock price could jump to $506 after seven years, which would be nearly four times its current stock price.

Based on Arm's current market cap, the company could be valued at around $520 billion in 2030. So it's unlikely that Arm stock will hit the trillion-dollar mark by then. But this AI stock could significantly multiply its current valuation over that time. That's why it would be a good idea to buy shares of Arm Holdings before they continue their red-hot surge and soar higher.